As luck would have it, both good and bad news hurts the USD these days. Any indication that the US housing recession is hurting US consumers causes the markets sell the USD because of the risk of recession and lower expected yields. But any news that US consumers are indeed alive and well and not cutting back on their spending has the effect of easing markets’ nerves and offering new opportunities for risk raking.
These involve shorting USD, and investors re-entering carry and other yield-seeking trades. Katherine Klingensmith an analyst at UBS maintains the view that USD weakness is extreme and that EURUSD should again drop below 1.40 amid increasing noises from European policy makers about EUR’s expensiveness at next week’s G7 meeting, as well as some signs of a slowdown in European growth. However, the USD may stay trapped between a rock and a hard place in the short term.
As for USDJPY, in the latest UBS investor’s guide, UBS analysts say the par should trade sideways. USDJPY trades currently above our upper trading band which is at 116.4. Recent macro news out of Japan (Bank of Japan on hold, mixed Tankan release, weak machinery tool orders and other data releases) give no signs for yen strength vs. the USD. Upcoming data releases are not expected to change this view. However, levels beyond 118 are not sustainable. The recent USDJPY upward move can hardly be explained by interest rate differentials. UBS analyst Dominic Schnider thus expects resistance levels at 118.20 to hold and likes to be JPY short at 114/113 but not at current levels. In the current environment UBS advise selling the USDJPY upside potential for a premium. Attractive strike levels for derivatives are at 118.4 targeting premiums of 300bp.
USDCHF set a new 2.5 year low at 1.1622 but has since moved up and stabilized around 1.18. Both currencies have stayed at low levels against the EUR. There are many different factors affecting the USD and CHF, both hurt in the short term by a resurgence in risk appetite. Although the USD strengthened
on the back of US non-farm payroll figures, it was subsequently punished by market disappointment at the lack of any strong statement from the European finance ministers. The FOMC minutes indicated that the Fed is worried about ongoing disruptions to the economy; although this has pushed USDCHF down, if the US economy were to experience serious disruptions, it would likely be CHF positive due to the resulting volatilities. Curiously, USD and CHF are subject to similar external forces right now, and we expect USDCHF to hover around current levels.
EURCHF reached a new all-time high at above 1.68 amid investors’ increased risk appetite and the lack of any recent comments on the weak CHF from Swiss National Bank (SNB) Chairman Jean-Pierre Roth. Roth said he was comfortable with the inflation outlook but warned that there were many uncertainties. As the SNB does not seem worried about the weak CHF, markets are likely to test new highs in the near future. Currently, the main focus of the SNB is to calm the money market and keep CHF 3M Libor around 2.75%. The return of investors’ risk appetite is CHF negative. Should CHF weaken further, the SNB could again reiterate that a weak CHF could make another rate hike necessary writes  Giovanni Staunovo in the latest edition of UBS investor’s guide.
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